Stock in focus

Johnson Matthey

Maude Holloway, Trainee Research Analyst
Adam Mallett, Illustrator

Price£21.97

52 week high-low£34.10—£16.14

Net yield4.07%

Hist / pros per10.62—10.76

Equity market cap£4,120

Johnson Matthey (JM) is a global chemicals company and leader of sustainable technology. Its aim is to use science to research, develop and deliver technologies to help build a cleaner world, make a positive contribution to society and improve lives.

It was founded over two hundred years ago and applies its accumulated years of expertise to provide solutions to the world’s environmental problems.  The company began as an assayer and refiner of precious metals and developed into being a specialist in the platinum group metals (PGM).  This helped it to become a global leader in catalyst manufacture, a key component of which is platinum.  It prides itself on its ability to continue to develop and adapt as a company to meet the evolving demands of the global community.

JM operates under four divisions; Clean Air, Efficient Natural Resources, New Materials and Health. Firstly, Efficient Natural Resources (ENR), accounting for 35% of operating profit, sells mostly base metal chemicals for use as catalysts in the manufacture of ammonia, ethanol, and hydrogen and also in the refinery cracking process. The division also refines and recycles precious metals as well as supplying glass manufacturers with key chemicals and supplies the Clean Air division with its raw ingredients. ENR earnings are correlated to PGM prices and prices of palladium and rhodium rose to all-time highs in 2019, following the introduction of the strict China VI legislation around vehicle emissions and the subsequent soaring demand for catalysts.  Following the onset of the Covid-19 pandemic, automotive demand and manufacture has plummeted and prices have fallen, with the recovery timescale uncertain.

The Clean Air division accounts for 59% of operating profit, and develops and manufactures catalysts for the automotive market which remove harmful nitrogen oxide and carbon monoxide from the combustion process. One in three new cars carries an emission control catalyst from JM, who say that in some cities the air coming out of their catalysts is cleaner than the air going in. This division may have had its heyday if the world moves to an electric vehicle solution for transport as diesel vehicle bans and restrictions have already been introduced in many countries and it is expected more is to come. Whilst JM’s main diesel vehicle market may be in decline in Europe, stricter emissions controls are being introduced in Asia opening up the catalyst market in China and India. 

Johnson Matthey prides itself on its ability to continue to develop and adapt as a company to meet the evolving demands of the global community.

The New Markets division is still in its formative stages and does not contribute to the Group’s operating profit yet but is working on the development of advanced new materials for hybrid and full electric vehicle battery cells. JM is aiming to build battery technology that can compete in three key areas: 1) charge time; 2) distance travelled per charge; and 3) price. The battery technology that JM is working on differs from its competitors in its composition such that their battery has a relatively low cobalt requirement which, if it works, may have a cost benefit. Cobalt is hard to source as over 60% is found in the Democratic Republic of Congo and this scarcity drives higher prices. Instead the batteries JM produce contain lithium and nickel and are called lithium nickel oxide batteries (eLNO). It is a more complex process but with its metals chemistry background, JM is confident that it has the experience to have an advantage here. Progress with the eLNO cathode technology has been encouraging with positive customer feedback, however running at full production capacity is unlikely until 2022 at the very earliest with further delays probable following the Covid-19 disruption to the automotive market.  

The final division is Health, bringing in 6% of operating profit and focussing on developing active pharmaceutical ingredients (APIs).  Their key application is in controlled substance generics within the USA, again relying on JM’s accrued complex knowledge and experience. Its products include anti-opiate addiction remedies as well as new immunotherapy oncology treatments. This division is often forgotten about but has a good pipeline of products and opportunities for growth. 

Having been around for over two hundred years over different industries, Johnson Matthey is a company that has proven its ability to adapt and evolve to meet changing demands over the very long term.  However, a number of headwinds continue to face the business, which include the structural decline of diesel vehicles and the growth in demand for electric vehicles. Whether the business can develop and manufacture more efficient battery technology to offset this will be the key determinant of its future success. 

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